India’s tax authorities are again sounding the alarm over cryptocurrencies, underscoring that the current wave of crypto activity is creating serious blind spots for tax enforcement.
During a recent meeting of a parliamentary standing committee on finance, officials from the Income Tax Department (ITD), which operates under the Central Board of Direct Taxes (CBDT), outlined how crypto-related tools and practices are undermining their ability to detect and tax income. According to coverage of the session, the discussion was part of a broader review titled “A Study on Virtual Digital Assets (VDAs) and Way Forward.”
Offshore platforms, private wallets and DeFi under scrutiny
Tax officials highlighted three main areas of concern: offshore exchanges, private or self-custodied wallets and decentralized finance (DeFi) applications. Together, these technologies allow users to move value outside the reach of traditional, regulated financial intermediaries.
Because these tools often do not require the same level of identity verification as domestic, regulated platforms, authorities warned that tracking taxable income becomes significantly harder. When crypto assets are traded on overseas platforms, routed through multiple DeFi protocols and then withdrawn to private wallets, reconstructing the full transaction history can be extremely complex — if not practically impossible.
Officials emphasized that virtual digital assets enable transfers that are “anonymous, borderless and near-instant.” In such an environment, funds can be shifted across multiple jurisdictions in seconds without passing through banks or other entities that routinely report financial information to the tax authorities.
Jurisdictional maze complicates enforcement
The ITD stressed that cross-border crypto activity poses one of the biggest structural problems. When multiple countries are involved in a single chain of transactions, identifying who ultimately controls the assets and where tax obligations arise becomes highly challenging.
Even with emerging international initiatives on data sharing and cooperation, tax officials said that current mechanisms are not yet sufficient. Information exchange is still patchy, and many foreign platforms are either lightly regulated or fall under regimes that do not prioritize detailed tax reporting. According to the department’s comments, these gaps inhibit proper assessment and hinder efforts to reconstruct transaction chains for audit and enforcement purposes.
The department described the situation as “virtually impossible” to manage in some cases, particularly when users deliberately design their activity to avoid traceability by hopping between exchanges, using privacy-oriented tools and relying on multiple wallets.
Heavy tax regime: 30% on gains and 1% TDS
India has not banned cryptocurrency trading, but it has imposed one of the world’s most stringent tax frameworks on digital asset activity. All profits from crypto transactions are subject to a flat 30% tax, regardless of the investor’s overall income level or holding period. On top of this, a 1% tax deducted at source (TDS) is applied to nearly all crypto transfers, whether or not the trade results in a gain.
This approach was designed to both generate revenue and create an auditable trail of activity. The TDS mechanism, in particular, gives authorities at least some visibility into on-chain and exchange-based movements originating from Indian users. However, as the ITD’s warnings indicate, the system is far from airtight, especially once assets leave regulated environments.
Losses not recognized: “friction rather than fairness”
The rigidity of the current tax rules has drawn criticism from industry participants. Under the existing framework, losses on one crypto asset cannot be offset against gains on another. Nor can they be carried forward to subsequent tax years. This means that even active traders who suffer large net losses may still face significant tax liabilities on their profitable trades.
Local executives have argued that this approach creates “friction rather than fairness,” discouraging legitimate activity and pushing some users toward unregulated or offshore platforms. When traders perceive the system as punitive, they may be more inclined to experiment with privacy tools or non-compliant exchanges, inadvertently expanding the very enforcement gap that authorities are worried about.
Regulatory stance: cautious openness, mixed signals
Despite the tough tax provisions, India’s stance on crypto remains nuanced rather than outright hostile. Trading is formally allowed, and the authorities have in some cases signaled a willingness to engage with global industry players. The planned return of a major United States-based crypto exchange in 2025 has been interpreted as an example of this cautious openness.
At the same time, policymakers continue to express skepticism about the broader role of private digital assets in the financial system. The official mood is best described as wary and conditional: crypto is tolerated under strict rules, but long-term regulatory clarity is still lacking. This ambivalence feeds uncertainty for both investors and businesses trying to plan ahead.
Growing domestic ecosystem under regulatory pressure
India’s crypto sector has nonetheless grown rapidly. Industry leaders describe the ecosystem as being at a pivotal stage, with user adoption rising and more platforms attempting to comply with local requirements. The Financial Intelligence Unit has granted approvals to dozens of crypto exchanges for the fiscal year 2024–2025, a sign that authorities do see value in keeping some activity onshore and within a supervised framework.
For exchanges operating legally in India, compliance burdens remain heavy. They must implement robust know-your-customer (KYC) checks, monitor suspicious activity and ensure proper collection and reporting of the 1% TDS on transfers. Inadequate implementation can expose them to penalties, reputational damage and even loss of their ability to operate.
CBDCs vs. stablecoins: the broader policy context
India’s central bank has repeatedly urged policymakers to prioritize the development and use of central bank digital currencies (CBDCs) over privately issued stablecoins. From the regulator’s perspective, a sovereign digital currency offers many of the technological advantages of crypto — speed, programmability, lower transaction costs — while preserving state control over money and improving visibility for supervision and taxation.
This policy tilt has direct implications for the tax debate. If CBDCs become widely used, authorities could gain far more granular information on digital transactions, reducing reliance on fragmented reporting from private platforms. By contrast, widespread use of offshore stablecoins and other private tokens could further obscure money flows, amplifying the enforcement challenges already flagged by the ITD.
What this means for Indian crypto users
For individual investors and traders in India, the message from tax authorities is clear: the government is paying close attention to crypto, and efforts to hide income through offshore or anonymous channels may eventually backfire. Even though enforcement is difficult, especially across borders, data-sharing agreements and blockchain analytics tools are advancing quickly.
Users should assume that significant, unexplained crypto wealth could trigger scrutiny. Maintaining detailed records of all trades, transfers and wallet addresses — including activity on foreign platforms — is becoming essential. Consulting tax professionals who understand the specific rules around virtual digital assets can help reduce the risk of non-compliance.
Implications for businesses and DeFi developers
For businesses, especially those building DeFi applications or offering wallet and exchange services, the evolving environment presents a double-edged sword. On one hand, demand is strong and India’s large, tech-savvy population makes it an attractive market. On the other, regulatory uncertainty, aggressive tax policy and enforcement concerns may deter investment and limit innovation.
DeFi developers face particular challenges. Many protocols are designed to be permissionless and pseudonymous, making it difficult to integrate conventional identity checks and reporting obligations. As authorities step up their focus on tax leakage, these design choices could come under increasing pressure. Future policy may push DeFi platforms serving Indian users toward some form of compliance layer, even if it conflicts with the original ethos of decentralization.
Possible directions for future reform
Looking ahead, policymakers in India are likely to confront a set of difficult trade-offs. Easing the tax burden — for example, by allowing loss offsets or reducing the TDS rate — could encourage more activity to remain within regulated channels, improving both transparency and revenue collection over time. However, any such move could be framed politically as being “soft” on speculative or risky assets.
Another possible path involves closer collaboration with foreign regulators to standardize reporting for cross-border crypto transactions. If major jurisdictions align around common rules for information sharing and platform registration, some of the enforcement difficulties described by the ITD could be mitigated.
For now, Indian authorities are making it clear that, while crypto is not banned, it is viewed as a significant challenge to the integrity of the tax system. The combination of strict tax rules, partial regulatory openness and growing use of privacy-enhancing tools will continue to define the country’s complex relationship with digital assets in the years ahead.